$80,000 + a Year

[scoopsteve]

Hello everybody! For those of you that have already reached retirement, I wanted to ask some advice of you.

I have a business that will produce $80,000 + a year in total profit, and basicaly runs itself without requiring to much of my time. here is the plan I have in place. I am going to get a job (dosen't have to pay a whole lot since we are debt free with the exception of our $900 a month mortgage payment) and I will place the $80,000 + profit from my business into retirement accounts, here is my question.

I am looking at investing into Roth IRS's and SEP fund, if I continue to place this same amount of money into these accounts each year, it looks like I will be able to retire in 5-6 years while drawing $40K out each year. With compound interest, I should have about $850K-$900K in these accounts. Am I looking at the correctly? Let me hear your suggestions. God Bless

 

[BigMoneyJim]

I just have to point out the spam detector is twitching on this one; this being your first post and baiting with an $80k/year business that requires so little attention a regular job is feasible. However, I will answer as if you're legitimate until the plot unfolds: EDITed (after thread is well into page 2): Okay, no spam so far an no remaining seque into spam.

There are limits on Roth and SEP contributions; are you proposing to build $900k in tax-deferred accounts in 6 years? I don't think you can do that, but you could save in after-tax accounts that much. Also, interest doesn't compound that much over 6 years of contributions. Perhaps you already have a nest egg?

Also, is the business not sustainable that you could just live off $40k of its income and save the other $40k until you have enough, and then sell the business?

EDIT: Struck out and added to first paragraph after seeing it's apparently not spam.

 

[retire@40]

...are you proposing to build $900k in tax-deferred accounts in 6 years? I don't think you can do that...

Actually, there are ways of doing that, but this guy doesn't sound like he's sophisticated enough to know how.

I'd like to get advice from him about how he managed to set up a business that makes $80K a year that runs itself without much of his time. I've seen these kinds of businesses firsthand, so I know they exist, but it would be nice to hear more about his.

I think he could offer this group just as much as we could offer him, so let's hear it.

 

[JPatrick]

I'd like to get advice from him about how he managed to set up a business that makes $80K a year that runs itself without much of his time.  I've seen these kinds of businesses firsthand, so I know they exist, but it would be nice to hear more about his.

I'll bite on that as well.

 

[aimhigh]

what's the "scoop", steve? Please don't tell me Avon.

 

[scoopsteve]

thanks for the reply. My business indeed is legit and this is not spam. I have a safety supply company and I provide protective clothing for the US Government/Nuclear Sector. I have a very LARGE customer that I have been doing business with for 7+ years and is very loyal. I have worked hard to establish trust, quality products, and on-time delivery.

My plan was in the event something were to go wrong and the business went away after 5-6 years, I would have socked enough away to retire however, if the business continues after said time-frame indeed I will continue in it. The reason I do not want to pull from the business for living income is because it will deminish the amount I can invest thus, prolonging the time it will take to aquire said funds.

 

[cute fuzzy bunny]

Any relation to 'scubasteve'?

 

[Nords]

I have a safety supply company and I provide protective clothing for the US Government/Nuclear Sector.

Welcome to the board, Steve.

Ya know, my shipmates and I fantasized for years what we'd do if we had the opportunity to provide a little "customer feedback" to the company that manufactured the submarine force's anti-contamination clothing. There was no doubt in anyone's mind that a whole lot of money was being made by the lowest bidder.

But, hey, maybe that was just the bureaucracy imposed on us by the Navy's Nuclear Reactors office.

 

[maddythebeagle]

I would like to hear how you are going to build 80k a year for 6 years into 900k.

 

[scoopsteve]

Here is how you do it with compounding interest. Typically your money will double for you after 7 years, so online those lines here is how it should work using that scale:

Year 1 $80,000= $160,000 year 7
Year 2 $80,000= $145,000 year 6
Year 3 $80,000= $125,000 year 5
Year 4 $80,000= $115,000 year 4
Year 5 $80,000= $105,000 year 3
Year 6 $80,000= $95,000 year 2
Year 7 $80,000= $85,000 year 1

This formula is putting equal amounts of 80K in each year.

 

[scoopsteve]

560K Principal = 830K Principal + Interest in 7Years

 

[JPatrick]

Here is how you do it with compounding interest. Typically your money will double for you after 7 years, so online those lines here is how it should work using that scale:

Year 1 $80,000= $160,000 year 7
Year 2 $80,000= $145,000 year 6
Year 3 $80,000= $125,000 year 5
Year 4 $80,000= $115,000 year 4
Year 5 $80,000= $105,000 year 3
Year 6 $80,000= $95,000 year 2
Year 7 $80,000= $85,000 year 1

This formula is putting equal amounts of 80K in each year.

Maybe I'm missing something, but I think your are expecting north of 10% per year.
If so, what are you basing that return on?

 

[scoopsteve]

agressive investments

 

[justin]

Sure. Beat inflation by 10% for seven years, and contribute 80000/yr. My calculations say you'll have about $830k by the end of year seven.


Good luck getting inflation+10% a year though. However, if you assume inflation+7% returns, you're talking closer to eight years. As long as you understand it could be a year or two more than you think till you can reach your magic number if your assumed return is wrong.

 

[maddythebeagle]

agressive investments

But of course, what else are there? At least you changed your 5-6 year timeline after explaining compound interest to the group

 

[REWahoo]

C'mon guys, cut scoopsteve a little slack.

I'll admit to being suspicious of his first post, but after explaining his company, he could be on the up-and-up. Let's give him the benefit of the doubt.

In his OP he did ask what we thought and for suggestions, but I'm not sure he was expecting Nords to complain about having to wear lead-lined underwear. I agree that his expectation of 10%+ returns for 5-6 (7?) years is optimistic, but he did ask nice.

 

[Nords]

Typically your money will double for you after 7 years

Uhm... good luck with that 10%+ APY return, Steve.  I think you've been led astray by someone projecting history into the future without accounting for the difficulty of making the future grow at a much higher rate than the entire 20th century (not just the last 15 or 20 years).

Let's talk compounding!  If you're planning to double your money every 7 years, the APY works out to:
[(FV/PV)^^(1/n)]-1 = [(double)^^(1/7)]-1= 10.41%.  
Or the Rule of 72 will give you 10.29%.  Close enough, but not if you're planning to do this in just 7 years.  Better stick with 10.41%.

The future value of your seven-year series of $80K payments at 10.41% gives
FV=PMT*{[(1+i%)^^n-1]/i%} = $80K*{[((1+.1041)^^7)-1]/.1041}=$768K.

For you to compound to $850K you'd need to raise those annual contributions to ~$88,476 or achieve an after-tax return of a bit more than 13.65%.  Or be willing to work the business most of an eighth year at "only" 10.41%.

Speaking as an aggressive investor myself, can you be more specific on where you anticipate getting that kind of boost for your money every year for the next seven?  And have you looked at the range of standard deviations of volatility that you're going to experience out at the bleeding edge of the return/volatility curve?  We're all working our own ER portfolios and expecting an equity risk premium more like 5%, so for you to double that return with "aggressive investments" would be a very impressive accomplishment indeed.

C'mon guys, cut scoopsteve a little slack.

I'll admit to being suspicious of his first post, but after explaining his company, he could be on the up-and-up.  Let's give him the benefit of the doubt. 

In his OP he did ask what we thought and for suggestions, but I'm not sure he was expecting Nords to complain about having to wear lead-lined underwear.

Spoken like a blissfully-ignorant guy who never had to wear full (or even double!) anti-Cs.

Let's just start with this image of what you feel like even before spending a couple hours poking around a 100 degrees F reactor compartment looking for "surprises":

 

[REWahoo]

Spoken like a blissfully-ignorant guy...

I have no idea of what you're talking about. I'm just enjoyin' life...

 

[Nords]

I have no idea of what you're talking about.

Well, I'll be darned. I never thought Naval Reactors would let these slip by a Google Image search!

 

[Jarhead*]

I have no idea of what you're talking about.  I'm just enjoyin' life...

Hey, don't worry about it.  Nords has called me "Blissfully Ignorant" also.

I think he likes us.

 

[REWahoo]

Hey, don't worry about it. Nords has called me "Blissfully Ignorant" also.

Poll on this one maybe.

I thought Nords calling me "blissfully ignorant" was a compliment, sort of a recognition of my unenlightened state of existence.

Nope, not gonna worry about it. That would interfere with my bliss....

 

[BigMoneyJim]

scoopsteve, sorry if it seems we're being rough, but it still sounds like you're hoping to go from 0 to $900k in 7 years on $80k annual contributions. It's not impossible, but it sounds like it's not something you should count on.

Also, I'm not sure you're counting inflation: inflation can eat into the value of $40k in today's dollars, so you may need more than $40k real dollars in 7 years to live like $40k in today's dollars provide, and $40k out of $900k is a tad high by many estimates.

However, socking away $80k/year is nothing to sneeze at, either. Whether or not you hit your $850k/$900k target you should have quite a bit of equity, and even if the business dries up you can continue with your job while the gains compound longer or go part-time and semi-retire drawing a smaller amount per year. Just a couple of ideas. The captial gives you flexibility and options.

It sounds like a good contingency plan, but be prepared for lesser returns and high volatility in your stated time frame for aggressive investments.

 

[New Thinking]

If you really have the cash to invest, your best bet may be to fund a Defined Benefit pension plan as I assume you have few, if any other employees. The downside is that you must contribute each year. This is most likely the only way to fund that high an amount each year using pre-tax money. An additional idea I think you should consider is setting up a 401(K) for your company. Even if you only have one person (Solo 401k), you can fund $42k or so..I would do this with a Roth 401k and you can really limit your taxation in retirement..If you have the luxury of running your own small business, there is little reason to EVER pay taxes on your investments because you can now use a ROTH without income limits applying.

 

[Mr._johngalt]

C'mon guys, cut scoopsteve a little slack.

I'll admit to being suspicious of his first post, but after explaining his company, he could be on the up-and-up.  Let's give him the benefit of the doubt. 

In his OP he did ask what we thought and for suggestions, but I'm not sure he was expecting Nords to complain about having to wear lead-lined underwear.   I agree that his expectation of 10%+ returns for 5-6 (7?) years is optimistic, but he did ask nice.   

Yeah, I agree this is doable (seen it) although I never did it myself. Consider this though:

Back when I was running my little manufacturing company, it never made any money
partly because my ex. and I were living the good life and thus taking a lot out
of the business. After I converted the corp. to a small holding company
with mostly passive investments, as I recall it turned a profit for 10 years in a row.
So, ironically, when I was "busting my pick", the corp. lost money. After I shut it down
and invested the capital elsewhere, it made money every year, with almost no
effort on my part. Come to think of it, we might have hit 80K once. Made me wish that
I had bought the company and just shut it down the next day. I thought about it.

JG

 

[Mr._johngalt]

Hey, don't worry about it.  Nords has called me "Blissfully Ignorant" also.

I think he likes us.

Hopefully not in a "Brokeback Mountain" sort of way.

JG